Posts tagged ‘Dodd-Frank’

05/24/2012

Dodd-Frank: What Did The Law Include?

After the crash of 2008, the Democratic Party, led by President Obama, passed the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010, and even though all Republicans, including Gov. Romney, instinctively denounced it during the Republican debates (2011-2012), perhaps it would be wise to first examine its many sub-titles, before passing judgment.

CONSUMER PROTECTION FROM BANKS: Title X of Dodd-Frank created a Consumer Financial Protection Bureau (CFPB), which can regulate banks, payday lenders, and other financial institutions. Its job is to protect consumers from abusive financial practices by promoting transparency and fairness as to mortgages, credit cards, student loans, and other financial natters.

MORTGAGES REMOVE PREDATORY PRACTICES: Title XIV of Dodd-Frank outlaws predatory lending by reforming mortgages. It requires loan originators to make a good faith effort to verify that consumers reasonably have the ability to repay their loans, when considering 2nd mortgages, insurance, assessments, and taxes. Points and fees are now limited to 3% of the loan.

INVESTOR PROTECTION: Title IX helps those who invest in stocks, bonds, and securities. It protects stockholders from being ripped off by those managing corporations, by requiring the disclosure of all CEO compensation. It makes Credit Reporting Agencies, such as Moody’s and Standard and Poors, provide accurate reports as to the financial condition of businesses. It gives the SEC the authority to impose greater fiduciary duties on securities brokers and dealers. It also addresses the sale of asset-backed securities and creates an office of the Investor Advocate.

FINANCIAL STABILITY IS GOAL: One explicit purpose of the law was to promote financial stability by ending bailouts for entities “too big to fail.” To better monitor the financial markets Title I of Dodd-Frank created: 1) Financial Stability Oversight Council; and 2) Office of Financial Research.

LAW COORDINATES FEDERAL AGENCIES: Dodd-Frank brings together representatives of: 1) Treasury; 2) Federal Reserve; 3) Currency; 4) Consumer Protection;  5) SEC; 6) FDIC; 7) Commodities; 8) Housing Finance; and 9) Credit Union Board.

LIQUIDATIONS INCLUDE INSURANCE AND NON-BANKS: The existing ability to liquidate banks was broadened to include insurance companies and non-bank financial entities. It allows for the orderly winding down of bankrupt firms.

BANKS CAN NO LONGER ENGAGE IN SPECULATION: The Volker Rule prohibits banks from engaging in proprietary trading.

HEDGE FUNDS AND VENTURE CAPITAL REGULATION: The law now regulates hedge funds and private equity funds. Investment advisors, hedge funds, and private equity firms now have to register with the SEC.

DEFAULT SWAPS AND DERIVATIVES REGULATION: Dodd-Frank brought the sale of derivatives out into the open, by requiring that they be traded on the exchanges.

INSURANCE REGULATION: The law allows the monitoring of the insurance industry.

LAW REQUIRES MONEY BE PAID BACK: Dodd-Frank reduced the amounts available under the Troubled Asset Relief Program (TARP) (2008) and the Housing and Economic Recovery Act (2008) and restricted the use of federal funds.

Dodd-Frank provided protection to consumers, credit card users, mortgage borrowers, and investors, and it gave the government more power to regulate the financial sector, so as to provide greater stability for all of us. The knee-jerk objection to the law by Republicans like Romney simply shows how out of touch he is with real people, and how much he is in bed with Wall Street.

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05/17/2012

Banking: How the System Evolved

With the Crash of 2008 and the melt down of our big financial institutions, questions have arisen as to how U.S. Banking evolved into what it is today.

While the Constitution did not expressly delegate the power to establish a federal bank, it clearly authorized Congress to coin money and to regulate its value. The Congress was also given the authority to make all laws “necessary and proper” to carry out those functions. In addition to a mint, George Washington opened the First Bank of the U.S. in 1791, which continued for 20 years, until their charter expired in 1811 due to non-renewal.

After the War of 1812, converting state bank notes into gold and silver became such a problem, Congress and James Madison were prompted into creating a 2nd Bank of the United States, in 1816. Andrew Jackson criticized it, saying it concentrated funds in the east, and limited local western banks from lending to farmers.

When Jackson became President, he was presented with a bill in 1832 to extend the charter of the 2nd U.S. Bank, but he vetoed it, arguing it was unconstitutional. He directed his Treasury Secretary to move all federal funds from the U.S. Bank into state banks, but his Treasury Secretary and his successor both refused, before the third in line finally carried out Jackson’s order.

As Jackson left office in 1837, newly-elected Martin Van Buren inherited the nation’s first serious depression. The crash came 36 days after he was sworn-in, as nearly every bank in the country closed. Van Buren tried to create a more stable system in 1840 by moving all federal funds from private banks into a U.S. Treasury.

As soon as President Tyler took over in 1841, he quickly reversed Van Buren’s policy, and vetoed two bills sponsored by Sen. Henry Clay to revive the U.S. Bank. President Polk, who followed Tyler in 1845, returned to Van Buren’s policy of keeping federal funds in the U.S. Treasury.

Before the Civil War, President Buchanan presided over an economic panic that witnessed the failure of several banks, and the volatility later continued, with additional panics under Grant in 1873, and Cleveland in 1893.

President Wilson signed the Federal Reserve Act in 1913, which created a new more stable system, by establishing 12 Federal Reserve Banks, charged with regulating the money supply, making loans to private banks, and by monitoring their reserves.

As President Franklin Roosevelt inherited the Great Depression, depositors started withdrawing their money from banks in 1933, triggering a panic that caused 5,000 of them to go out of business, the day before he was inaugurated. The new President promptly closed all banks, declared a Bank Holiday, and signed an Emergency Banking Act (1933) that established the Federal Deposit Insurance Corporation (FDIC) to make deposits safe by providing insurance for them. Congress also passed the Glass-Stiegel Act (1933) to take banks out of stock market speculation.

Ronald Reagan ushered in a new era of right-wing deregulation, during which he pushed the repeal of financial sector rules. As the conservatives beat the dumb louder and louder, they pressured moderates like Bill Clinton to repeal of the depression-era Glass-Stiegel Act. For eight years under George W. Bush, his minions looked the other way, as speculators took over the financial sector, and led us into the Crash of 2008.

To correct the problems caused by deregulation, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, as a first step in re-regulating the financial sector. That is how we got to where we are, but we are not there yet, and we have a ways to go to fully stabilize the system.